The Netherlands – Summer 2021

Amsterdam office market: Surplus or impending shortage when the dust clouds of COVID-19 have settled?

CITY SPECIALS

Savills Research


Prior to the pandemic, Amsterdam benefited tremendously from its favourable business climate, tourism, highly-educated workforce, strategic location in Europe and the presence of many international companies.

The Amsterdam economy had been growing fast until the COVID-19 pandemic spread across the globe. COVID-19 dealt economies everywhere a severe blow and Amsterdam was no exception. Partly due to the favourable business climate as mentioned, economic recovery in Amsterdam in 2021 and 2022 is expected to pick up faster than the national average (Rabobank).

Based on the economic downturn in 2020, one would expect to see a decline in the demand for offices. However, this was hardly the case in Amsterdam: -0.2% compared to 2019. In the same timeframe, take-up in the G4 (including Amsterdam) declined on average by -5.7%. So far the market appears to be very stable, but how will COVID-19 continue to impact office occupancy? It is expected that we will be using our offices differently in the future, but does this also mean that we will not be needing as much office space? In addition to this theme, there is another important topic hanging over the market: sustainability. This theme may have been pushed to the background due to COVID-19, but will become more important than ever before in the coming years. This is partially the result of changing regulations and legislation regarding energy labels. From 1 January 2023, all offices will require at least energy label C to be rented out. From 2030, label A will be the norm. At least 650,000 sq. m. of Amsterdam offices currently have energy label D or worse. As a result, some of this space will be off the market in 1.5 years, shrinking the stock.

In view of these two themes: what will the impact be on vacancy rates in the Amsterdam office market? And how will this impact the competitive position of Amsterdam if no action is taken?

No structural drop in demand

Despite the economic downturn, 2020 did not shown a structural loss of demand.

Take-up fell by 43% in 21Q1 compared to 20Q1, but was still mostly equal to 19Q1. Despite the decline, recovery appears to have begun. 21Q1 was the strongest quarter in a year. The average take-up level of quarters 20Q2 through 20Q4 was 55,000 sq. m. compared to the level of 66,591 sq. m. in 21Q1. Just-Eat Take-Away (14,416 sq. m.) and ING (31,500 sq. m.) were the most important lease transactions in 21Q1, responsible for 69% of the total take-up volume in 21Q1.

The type of businesses renting office space in Amsterdam shifted in 21Q1 compared to 20Q1. In 20Q1 for example, financial services were only responsible for 14.2% of the take-up, rising to 53.7% in 21Q1, making this sector the largest in terms of take-up in 21Q1. The largest transactions in this sector were ING Bank and DRW Europe Derivatives B.V.

IT companies and corporate and specialist business service providers were the most dominant sectors, responsible for 89% of the take-up in 21Q1 compared to 69% in 20Q1. In addition to financial services, IT remains an important sector for the Amsterdam office market, as shown through recent transactions of Just-East Take Away, Tellow and Fairphone.

Until now the market has appeared to be relatively stable due to demand for office space from businesses in certain sectors, such as IT, specialist business service providers and other business services. Although the market is stable, businesses made fewer or no decisions on premises in the last year.

Office market

Improved supply-demand ratio in the Amsterdam office market

Slower decisions on premises have contributed to an improved supply-demand ratio, as shown from the vacancy rates on the Amsterdam office market. Vacancy rates rose from 5.2% in 2020Q1 to 6.1% in 2021Q2. It is striking to note significant differences in vacancy development in various office subareas.

Supply has grown most significantly in the Houthavens district and in Amsterdam city centre.

The most important reason is that many offices in these areas were purchased pre-COVID-19 by investors intending to renovate and sell them. A good example is Aware House in Houthavens which was recently completed.

Alongside slower decision-making, the uncertain position of companies such as Booking.com, tenant of no less than 128,500 sq. m. in Amsterdam, meant that many of these renovated offices were not taken up by the market and that the vacancy rate rose. Economic downturn, fear of potential reorganisations and uncertainty with regard to the future role of offices has resulted in reduced activity among occupiers. These developments made investors risk-averse when it came to acquiring office real estate over the past year.

investment market

Effects of investment market clearly visible

A strong decline of the investment volume in the last year was the result, while interest in the core product remained – a trend that was visible across the board in the market. Investors battled for the ‘core’ product, keeping these revenues stable or putting them under further pressure. At the same time, there were almost no transactions for secondary offices and the price levels of transactions that did take place were lower.

The growing importance of working from home will continue to be a risk in the short term.

Once this risk can be better estimated, investors will broaden their horizons with a focus on value-add and opportunistic investments. The impact of COVID-19 on the role of offices are seen as a risk to future demand for office space. New-build developments and the required sustainability upgrades have an important role to play in future office supply and the expected future supply-demand ratios.

The aspects discussed will be studied further to gain more insight into these future supply-demand ratios, starting with the expected effects of COVID-19 on the demand for office space.

Working from home

Flex ratio has increased, but the downsides of remote working are becoming clearer

In mid-2020, various companies indicated that offices would become secondary to working from home, which was expected to become the standard in the future. Companies including Facebook, Microsoft, Google and Amazon quickly made the switch to remote working in April 2020. However, over the last year, the downsides to working from home have become clear for almost every type of company.

Research by PwC and others revealed that working from home for extended periods of time leads to a considerable increase in cost for employers. These costs are the result of the effects of less cooperation, decreased involvement with the organisation, isolation and stress. A decreased sense of involvement among employees weakens the organisational culture. The long-term effects of this lack of involvement include higher staff turnover, higher rates of absence due to illness and decreased productivity.

As a result, insights with regard to working from home and the role of office buildings have since been adjusted. Companies are more interested in making their business operations more hybrid, allowing employees to work in flexible locations. Employees will be expected to alternate between working from home and on location. However, this does not necessarily mean that companies will be needing less office space in the future. There are various reasons for this:

  • Meeting spaces often require more space than workstations;
  • Employees will not only be working from home more but also in other locations such as flexible office concepts. This means working in other locations, but still in office buildings;
  • Because employees want to work from home too, offices may have lower occupancy rates during ‘off-peak hours’. This will not be the case during peak hours when people want to meet each other. This problem cannot be solved by divesting of offices.
Companies are not expected to need fewer square metres in the future.

Investment market update

Office developments in the pipeline increase availability

Despite the fact that demand might remain stable, supply-demand rations may become disrupted due to growing supply. The current new-build plans will amount to an additional 374,000 sq. m. of office space in Amsterdam between now and 2023. This total includes both planned developments and offices currently under construction. The number has also been adjusted for pre-let.

Additions to the office stock are definitely needed at this time. As always, it is important to continue to rejuvenate the stock to ensure its continued appeal to occupiers. We are also facing a need for considerable sustainability upgrades, making it necessary to continue to build offices selectively, as shown from the following analyses.

Future supply

Office sustainability upgrades

As a result of changing regulations and legislation from 2023, a considerable amount of office space will become unlettable in its current state. From 1 January 2023, it will be illegal to use office buildings with an energy label of D or worse. Approximately 650,000 sq. m. (11%) of office stock in the municipality of Amsterdam is currently not in compliance with this requirement.

Amsterdam office stock

Expected drop in demand due to required sustainability upgrades to lead to shortage

11% of the Amsterdam office stock will require a sustainability upgrade before 2023 to continue to be lettable. The question is, will this be possible considering the amount of time needed to complete sustainability upgrades?

Research by Kadaster shows that the speed at which these upgrades can be completed is not in line with government objectives. In the period from 2018 to 2020, the number of non-sustainable offices declined by just 12%. This means that if the sustainability upgrades continue at this pace, almost 575,000 sq. m. of Amsterdam’s office stock will become unlettable by 2023.

As the date of 1 January 2023 approaches and owners are forced and willing to take action, it is expected that upgrades will speed up in the coming period to above the expected 12%. An additional incentive is that owners can benefit from something called a green premium until 2023. This premium can be included in the special provisions of the contract, allowing tenants and landlords to make agreements about the steps needed to make their offices compliant with the label C requirement on time. As of 2023, owners will have full responsibility.

In spite of this, not all office buildings will be made more sustainable by 2023 due to the current shortage of construction professionals and a shortage of raw materials. The percentage of upgraded offices is expected to be between 10 and 30%. Based on this range, various possible scenarios have been detailed.

  • Scenario 1 In this scenario, only 10% of the sustainability upgrades of Amsterdam office stock needed at present (650,000 sq. m.) will be completed (negative scenario)
  • Scenario 2 In this scenario, 20% of the sustainability upgrades of Amsterdam office stock needed at present (650,000 sq. m.) will be completed (base scenario)
  • Scenario 3 In this scenario, 30% of the sustainability upgrades of Amsterdam office stock needed at present (650,000 sq. m.) will be completed (positive scenario)

The sustainability regulation does not apply to historical monuments. This means that offices which are historical monuments, which have an energy label or D or worse, are lettable. This regulation has been taken into account in the following analysis.

This scenario analysis shows that even in the most optimistic scenario for more sustainable office stock, more offices will become unlettable by 2023 than will be built during the same period. As shown in the graph, in this scenario approximately 305,000 sq. m. will face obstacles to letting from 2023. Increasing shortage in the Amsterdam office market is looming. Based on this scenario, vacancy rates can even decline to 5.5% by 2023, a substantial decline compared to the current level of 6.1%.

Although this increasing shortage applies to the entire municipality of Amsterdam, differences can also be noted between subareas in the city.

Differences per subarea

Naturally, the area expected to be most affected by the shortage of supply is the city centre of Amsterdam. This area holds 37% (or 239,485 sq. m.) of the Amsterdam office stock requiring a sustainability upgrade, which is mostly the result of the age of the stock: the average year of construction is 1845. Amsterdam City Centre has a vast amount of historical monuments. 25% of the unsustainable office stock in Amsterdam City Centre concern historical monuments. Inevitably, these historical monuments need to be upgraded as well, in order to comply to future sustainable standards.

In second place after the city centre is Amsterdam Zuidoost, with the largest number of offices in need of a sustainability upgrade. This is striking due to the fact that this office stock is relatively young, with 1992 as the average year of construction. In spite of this, 69,968 sq. m. (7% of the office stock in Amsterdam Zuidoost) will need to be made more sustainable by 2023.

Systainability

Sustainability upgrades will become the future standard.

By 2030, offices should at least boast energy label A or higher. This means investors are increasingly compelled to anticipate these transition risks in which changing laws and regulations can potentially have a negative impact on real estate portfolios. Additionally, and partly due to more far-reaching legislation in the field of sustainability, investors have become more aware of the physical risks to their real estate portfolios as a result of climate change, for example. In addition to mitigating these risks, real estate investors are increasingly eager to make positive contributions to the United Nations’ sustainable development goals (SDGs). Investors outline the risks and their ideas for contributions to the sustainable development goals in an ESG (Environmental, Social, Governance) strategy. Due to the fact that different investors face different risks and that there are varying ways in which they can make positive contributions, this strategy also varies per investor. Despite these differences, real estate investors include a number of standard criteria in their investment strategy.

Outlook

During the pandemic, it was feared that supply would increase as a result of economic downturn and the changing role of offices.

Now that the pandemic is nearing its end, it can be concluded that supply has increased slightly, but that the effects have remained limited so far. The market may have changed slightly from a landlord’s market to a tenant’s market, in which incentives have increased, but with a vacancy rate that is still relatively limited at 6.1%. It is not yet entirely certain what the future will hold for the Amsterdam office market, although it has become clear that two aspects will be important in the coming period.

Number one is how companies will respond to the need for office space going forward. The role of the office will change and employees will be given the opportunity to work in flexible locations. Offices will be used more as meeting spaces. Because employees want to work from home too, offices may have lower occupancy rates during ‘off-peak hours’. This will not be the case during peak hours when people want to meet each other. This problem cannot be solved by office divestments.

Number two, the Amsterdam office market is faced with a considerable need for sustainability upgrades. Even working from the most optimistic scenario for sustainability upgrades, in which the speed at which these upgrades are performed is almost three times as high as in recent years, a whopping 305,000 sq. m. of office space will become unlettable in 2023 as a result of more stringent legislation. Historical monuments which have an energy label D or worse, are considered as lettable. Even when this specific regulation has been taken into account, it is more likely that the stock will shrink and not grow. Based on this scenario, vacancy rates could even decline to 5.5%, but it is vital that sustainability upgrades do not grind to a halt in 2023 (see inset).

Owners, tenants, and especially the government are already hard at work to make the real estate market more sustainable. Partly as a result of these efforts, sustainability upgrades will have a considerable impact on the office market for an extended period of time. This means that now and in the future, high-quality offices will continue to be needed in order to meet future demand to enable Amsterdam to retain its current competitive position.

"Now and in the future, high-quality offices will continue to be needed in order to meet future demand to enable Amsterdam to retain its current competitive position."

Key Findings

Take-up

The historic economic downturn of 2020 is barely visible in the take-up figures for Amsterdam. 21Q1 was also the strongest quarter since 20Q1. Current demand mainly comes from companies in the IT, business and specialist business services sectors (89%).

Future office plan

It is expected that companies will be operating in a more hybrid form, in which employees are given the opportunity to work in different locations. The coming period will reveal how companies plan to use offices in the future.

Office supply

The supply-demand ratio in the Amsterdam office market has improved during the pandemic. Vacancy rates rose from 5.2% in 20Q1 to 6.1% in 21Q2. The Amsterdam city centre witnessed the greatest increase in vacancies.

Investment

Compared to 2019, the investment market did not perform well in 2020. Investors battled for the ‘core’ product, keeping these initial yields stable or putting them under further pressure.

Sustainability

The Amsterdam office market faces a considerable need for sustainability upgrades as 650,000 sq. m. currently does not comply with the requirements that will take effect in 2023. Even working from the most optimistic scenario for sustainability upgrades, in which the speed at which these upgrades are performed is almost three times as high as in recent years, a whopping 305,000 sq. m. will become unlettable in 2023 as a result of more stringent legislation.

New-builds

Despite the planned new-builds, the market may even become tighter.

Amsterdams position on the Dutch office market

Continuing to selectively add sustainable offices is therefore necessary to continue to meet future demand to enable Amsterdam to retain its current competitive position in the market.

Sources Brainbay Database, BAG, Vastgoedmarkt, RVO, City of Amsterdam, Metropoolregio Amsterdam, Eurostat, CBS, PwC, Kadaster, CPB, Rabobank


Savills World Research We provide bespoke services for landowners, developers, occupiers and investors across the lifecycle of residential, commercial or mixed-use projects. We add value by providing our clients with research-backed advice and consultancy through our market-leading global research team



Ellen Waals

Head of Agency

+31 6 151 82483

ellen.waals@savills.nl


IJsbrand Brunger

Head of leasing Amsterdam

+31 20 301 2000

ijsbrand.brunger@savills.nl


Jordy Diepeveen

Associate Director Investments

+31 20 301 2000

jordy.diepeveen@savills.nl


Martijn Onderstal

Head of Vaulation

+31 20 237 9955

martijn.onderstal@savills.nl


Jordy Kleemans

Head of Research & Consultancy

+31 6 11 08 36 54

jordy.kleemans@savills.nl


Savills plc: Savills plc is a global real estate services provider listed on the London Stock Exchange. We have an international network of more than 600 offices and associates throughout the Americas, the UK, continental Europe, Asia Pacific, Africa and the Middle East, offering a broad range of specialist advisory, management and transactional services to clients all over the world. This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. While every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research.



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